What’s Causing Oil Prices To Rise? You’ll Be Surprised To Know 

by Don Azarias
March 20, 2011
Why is it that when the elusive economic recovery for the United States is starting to take its roots, some unforseen and unwelcomed events seem to prevent it from happening? Of course, what’s happening in some parts of the Arab world bodes well for democracy as the citizens of those countries are now ousting their tyrant leaders either through peaceful means or through force.

The latest radical agitation happening in oil-rich Libya under Moammar Gadhafi, while a welcome event for advocates of democracy, is affecting our country’s economic recovery due to the resulting rise in oil prices. It’s having Wall Street and the Obama administration worried what the prolonged conflict in Libya and other Arab countries will bring not only to the United States’ but also to the global economy. I have this question to ask, “Are their fears really justified? 

On Capitol Hill recently, Federal Reserve Chairman Ben Bernanke told Congress that a prolonged rise in oil prices would pose a danger to the economy. Bernanke said that political upheaval in the Middle East, has caused oil and gasoline price to march higher. I’ll rephrase my question this time, “Is that price increase really justified?” Is Bernanke really being honest about his analysis of the problem or is he just another one of those Wall Street or Washington, D.C. insiders?

While the Federal Reserve chief is saying that the current political unrest in some Arab countries, particularly Libya, is causing the oil prices to rise, some experts, however, are blaming the same people who brought us the $140 per barrel oil and $4 per gallon gasoline in 2008: Wall Street speculators.

The mechanics of oil futures speculations are really complex and have lots of variables even for an economist, let alone a lay person, to understand. However, I’ll try to simplify its definition. In layman’s term, a speculator in the oil markets is defined as a buyer of oil futures contracts——just bear in mind that these are just paper transactions and not actual oil——with the hope of selling that oil in the spot market at some future date at a higher price. A speculator hopes that when the contract expires (or at anytime within that period), he or she will be able to sell the oil committed in the contract for a price greater than the contract price. Taken collectively, speculators who buy large amounts of oil futures can swing the price one way or another. Speculators who buy oil futures at higher than the current market price can cause oil producers to horde their oil supply so they can sell it later at the new, higher “future” price. This cuts the current supply of oil on the market and drives up both present and future prices. Most experts agree that the recent rise in oil prices is due to the flows of money that those traders who, in reality, are oil speculators pump into oil markets. These bets are fueled by investor expectations that the U.S. and global economies are poised to return to growth and thus spark increased use of oil. Some politicians and economists blame Big Oil and the Organization of Petroleum Exporting Countries(OPEC) for raking in huge profits. They also cite the weakening dollar as a contributing factor. Some industry analysts even blame thinning supplies on developing countries like India and China that are consuming more, while oil production can’t keep up the pace. These opinions, however, are being debunked by Wall Street’s own economists, independent analysts and the OPEC itself. OPEC claims the high prices seen these days are the fault of speculators that have snapped up billions of dollars in oil futures, as other sectors of the economy suffer. OPEC knows very well that raising the price of crude oil is not good for the economic recovery of the United States, the largest economy in the world and OPEC’s largest customer. OPEC argues that it would result in a massive financial loss for them should the United States economy goes in crisis again. Another thing that we have to understand is that during the advent of oil futures trading, control of oil prices has left OPEC and gone to Wall Street. Those greedy Wall Street investors and speculators are getting richer and richer by the day while hardworking taxpayers and consumers, like us, are always the ones getting the shaft. Isn’t it about time that those political leaders in Washington, D.C. do something about it? 

But, to be honest with you, I am not really optimistic that those elected officials in the nation’s capital will do something about curbing Wall Street’s excesses. Don’t forget that both, the occupants of the White House and Capitol Hill, are recipients of Wall Street’s largesse. Moreover, they are not being discreet about it. 

It’s my personal belief that Wall Street speculators’ greed is behind the high prices of oil. It’s really about oil being an attractive investment for speculative investors right now. And who are those investors? They are those institutional funds, hedge funds, pension funds and other large Wall Street investment vehicles and banks. Sound familiar?

Like most of us know, the free market concept in the United States’ economy also have some drawbacks. Unbeknownst to majority of the American public, the current oil crisis that’s adversely affecting the economic recovery is being caused by those money-hungry Wall Street financial establishments with the help of those political leaders in Washington, D.C.. They are in cahoots and should be the ones to blame and not those equally-greedy oil-producing countries. Libya, in particular, is not the United States’ main oil supplier. For the readers’ information, the U.S. only gets 3 percent of Libya’s oil production while 85 percent goes to Europe and the rest going to other Asian countries. Therefore, any political upheavals in Libya are not supposed to have any major impact on the price and supply of oil in the United States. Those Wall Street’s and Washington, D.C.’s movers and shakers are only using Libya’s political crisis as a convenient excuse to raise oil prices. Surprised?    

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